Andy Haldane, whose role is to help prevent the financial system from suffering another meltdown, said British banks could take advantage of their relative strength after sorting out their finances earlier than their European counterparts.
Haldane, who was in Edinburgh to take part in a conference examining the fallout of the credit crisis, said: “When you’re in a bust, everyone’s pessimistic. The banks are ducking for cover and don’t want to put risk on the table.
“But if no-one puts risk on the table, then there’s too little risk taking, which is exactly where we are at the moment.
He added: “The metaphor we use is taking the punchbowl away from the party, but occasionally you need to add a bit of vodka just to get things going.”
In a renewed bid to boost lending to small businesses, the UK government recently unveiled the National Loan Guarantee Scheme, or credit easing, after Britain’s big banks came under fire for failing to meet lending targets to small firms under the Project Merlin agreement. The scheme, backed by £20 billion of government guarantees, will enable participating banks to provide a 1 per cent discount on new loans to businesses with annual turnovers of up to £50 million.
Haldane, who sits on the Bank’s new Financial Policy Committee and has been tipped to succeed Sir Mervyn King as governor, said the UK’s banks are currently in a relatively better position than their counterparts in many European countries, partly because they became embroiled in the financial crisis earlier.
“We’ve been through our wringer and learnt some of our lessons, and we’ve strengthened our sea walls on capital and liquidity,” he said.
“In Europe there wasn’t the same loss recognition and building of buffers that UK banks have done.”
Those buffers of capital and liquidity built up by UK banks “are there to be used and absorb stress”, Haldane said.
“They’re there to protect the real economy and lending to the real economy when the going gets tough.”
In a paper co-authored with Bank of England economist Benjamin Nelson which was presented at the University of Edinburgh Business School conference, Haldane said international regulators need to go back to drawing board when it comes to dealing with risk.
He pointed to the Vickers proposals, which argue that banks should ring-fence their investment activities from the retail arms, as one way of adopting a “firebreak-type” approach to prevent a banking crisis from spreading.
“In a complex, uncertain environment, the only fail-safe way of protecting against systemic collapse is to act on the structure of the overall system, rather than the behaviour of each individual within it,” said Haldane.
Set up by the Bank of England following the 2008 financial crisis, the FPC will have the power to make recommendations to the Financial Conduct Authority and Prudential Regulation Authority, the two new regulatory bodies that are set to replace the Financial Services Authority next year.
Haldane said: “We now have something that’s job is to head off the boom but, just as important, cushion the bust.”